Russia Bargains For Bigger Stake In West's Energy

By STEVEN R. WEISMAN

Published: June 12, 2006

Russian, American, European and Japanese officials are negotiating over whether Russia should be allowed greater latitude to invest in utilities, pipelines, natural gas facilities and other infrastructure in the United States and Europe.

In a draft declaration for endorsement at a Group of 8 summit meeting next month in St. Petersburg, Russia, broadened Russian access is paired with something the West wants: endorsement of market principles and greater access for foreign investment in the energy industry of Russia, one of the biggest oil and natural gas producers in the world.

Russian investment in Western energy facilities has been relatively modest, like Lukoil's investment in a chain of 2,000 filling stations in the United States. But earlier this year, when Gazprom, the giant Russian natural gas monopoly, expressed an interest in buying Britain's largest distributor of natural gas, it raised a furor in Britain similar to reactions in the United States to a Chinese bid for Unocal and a Dubai company's arrangement to control operations at several American ports.

The political maneuvering keeps a channel for progress open at a time of fierce tensions between Russia and the West over access to energy supplies. In January, Russia cut off natural gas shipments to Ukraine during a price dispute, which shut down deliveries in Europe. The move prompted denunciations from the United States and Europe, and was seen as an effort to punish Ukraine, long dominated by Russia, for its political independence.

More recently, Vice President Dick Cheney and other American officials have rebuked Russia for its increased state control of the energy sector, its crackdown on dissent and what they say is an effort to muscle out Western investments in oil and gas pipelines in the Caspian Sea, where the United States has been trying to secure energy supplies in ways that would bypass Russia.

The goal of the energy negotiations, which are being held at the highest levels, is to smooth over the most pointed differences between Russia and the West with some mutually acceptable language. ''The U.S., Russia and Europe are trying to find their way to common ground on the road to the summit,'' said Daniel Yergin, president of Cambridge Energy Research Associates, who talked with Russian and European officials in Europe last week.

The negotiator for the United States is Faryar Shirzad, a deputy national security adviser for economic affairs. For France, it is President Jacques Chirac's diplomatic adviser, Maurice Gourdault-Montagne. For Russia, it is Igor Shuvalov, President Vladimir V. Putin's chief aide in planning the meeting.

Mr. Shuvalov said Russia was determined to get the Group of 8 summit meeting to endorse the principle that for Russia, ''energy security'' meant greater access to investment in the West and to the means of delivery of oil and natural gas. Mr. Putin has said that energy security will be a main theme of the meeting.

Mr. Shuvalov said Russia was prepared to use its leverage to get that access, and had held up a decision on foreign bids for exploring a potentially huge natural gas reserve off the Russian coast in the Barents Sea until it was clear that the West would be receptive to offering similar bids by Russia for ownership in American and European energy facilities.

Russian investment has in fact already begun, and it has begun to stoke controversy. Rebuffing pressure from many in Britain, Prime Minister Tony Blair said he would not try to stop the Russian effort.

Gazprom and Lukoil are not the only Russian entities looking abroad. Now the Russians appear interested in investing in pipelines and liquefied natural gas conversion facilities on the East Coast, which some experts fear could reignite the passions that swirled around Unocal and the Dubai port deals, both of which fell through. Critics of those deals successfully argued that they would have surrendered vital strategic economic assets to foreign control.

''Gazprom has not been specific on what it wants in North America,'' said Thane Gustafson, professor of politics at Georgetown University. ''But what they want to do is replicate what they've done in Germany and in varying degrees throughout Eastern Europe, '' he said, referring to investments by Russian companies in European energy production and transmission.

Mr. Putin aims to use the St. Petersburg summit meeting to demand respect for Russia as a major energy producer. Russia wants to rebut the argument, heard after the Ukraine natural gas cutoff, that it is not a reliable producer, and to bury suggestions from some critics in the United States that it should be expelled from the Group of 8 nations.

''The summit should recognize that Russia plays a key role in providing energy security, and that Russia is ready to open its energy reserves to foreign investment,'' said Mr. Shuvalov in a telephone interview. ''We think that after this summit, no one will again question the membership of Russia in the G-8.''

The United States is looking to the meeting to endorse Mr. Bush's vision of ''energy security,'' particularly reduced dependence on Middle East oil, greater variety of oil resources and more nuclear power. One other important part of the American vision is that, especially after the Ukraine cutoff, there should be more efforts to bypass Russia for natural gas exports, especially to Europe.

Not surprisingly, the Russians have a different definition for ''energy security,'' interpreting the term to mean greater guarantees of access of Russian energy to Europe, not less. Ownership of European and American pipelines would support that goal, Russians say.

One area of Russian-American competition that could come up at the summit meeting is the activity in the Caspian Sea, where at least since the 1990's, after the collapse of the Soviet Union, the United States has sought to encourage oil and gas pipelines that would not go through Russia. Earlier this year, for example, Secretary of State Condoleezza Rice urged Turkey and Greece not to engage Gazprom as a partner in bringing natural gas to southern Europe. Gazprom is viewed in the West as a shadowy creature of the Russian state that has enriched the people around Mr. Putin.

Comments like those of Ms. Rice and Mr. Cheney challenging Russian energy dominance in the region have hurt the atmosphere for the summit meeting, Mr. Shuvalov said. But American officials say it is in Russia's interest to encourage diversity of supply.

''Despite what they think, it's not that we want to shut Russia out,'' said another senior administration official involved in planning the summit meeting, who requested anonymity because he did not want to speak publicly about issues still under negotiation. ''That's ridiculous. Russia will always be a major energy exporter and transit route. What we're trying to do is make sure there is no monopoly on energy, to avoid someone manipulating the markets.''